Easy, cheap credit has created a fantasy world where everyone "deserves" everything
right now, and trade-offs and sacrifice have been banished as unnecessary.

Debt offers a compelling fantasy: there is no need for difficult trade-offs or sacrifices,
everything can be bought and enjoyed now. In the old days when credit was scarce and
dear, buying a better auto required substituting 1,000 brown-bag lunches for restaurant meals:
yes, four years of daily sacrifice.

Sending a child to college meant no meals out (or perhaps once or twice a year), driving
an old car, no vacations other than camping, working overtime to make a few extra dollars,
summer jobs for every teen in the family and a hundred other sacrifices and trade-offs.
All too often, only the oldest got to go away to university; younger siblings had to sacrifice
their education for the greater good of the family.

If the oldest sibling was fortunate enough to earn a decent salary after graduation, he or she sacrificed to
pay for the education of younger siblings.

Trade-offs and sacrifices were the core of household finances for those families that
sought to "get ahead" or purchase things that required substantial cash.

Abundant, cheap credit upended the incentives to make adult trade-offs and sacrifice
consumption for future benefits. Why eat 1,000 brown-bag lunches when you can buy
a new car for $500 down and "easy" monthly payments? Heck, you don't even need to pay for
the lunches with cash; just charge them.

Want to go to college? Just borrow the money via student loans. Why scrimp and save
when Uncle Sam will guarantee $100,000 in student loans?

Why choose between a lavish vacation, a year of college or a boat? Buy all three on credit.

This mentality has infected the entire nation and culture. Why should we have to choose
between $600 billion military spending and $600 billion Medicare spending? Let's just
borrow the $1.2 trillion every year to pay for both.

I personally know families that have no savings or assets to speak of, but every summer
the parent(s) and kids travel overseas with little effort made to budget-travel. These
families earn good incomes but the income is all blown in current consumption: the teens
get daily Starbucks and a cafe-bought lunch, dinner is often a sit-down restaurant meal,
and all the computer/gadgetry in the household is the latest and greatest: iPhones, iMacs,
iPods, etc.

I also know young families who are "working poor," where the father earns less than $20,000
a year and Mom stays home with the two young kids--yet they own a much nicer and newer car
than I do, and the Federal government gives them over $2,000 a month in cash benefits:
$500 Section 8 rent subsidy, $600 in food stamps and $1,000 in free medical care.

As a self-employed person, I have to earn $3,000 a month to net the $2,100 this family receives
every month, so it's like a magic full-time wage earner slaves away and gives this family
his entire earnings.

Only there is no "magic worker:" the $3.8 trillion the Federal government distributes
every year is two-thirds tax revenues and one-third borrowed.

To the degree that our
government distributes $1.3 trillion in borrowed money every year, everyone receiving money from
the Federal government is living off debt that draws interest and will never be paid.

Thus it is an artifice to say that a person collecting money from the Federal government
is "debt-free": the debt they are incurring is simply once removed.

Credit leverages income. If $10 per month in disposable income can leverage
$100 in debt, then if disposable income rises to $20 per month, debt can be doubled to
$200.

Lowering interest rates increases leverage. If the interest rate is cut in half,
$10/month can leverage $200 in debt.

We are now at the end-game of these two expansions of leverage: incomes are no
longer rising, and interest rates have been cut to near-zero when adjusted for inflation
(a.k.a. loss of purchasing power).

Relying on credit to fuel "growth" in everything only worked when incomes were rising
and interest rates could be cut. Now that incomes are stagnant for 90% of the
populace and interest rates have been slashed, there is no way to increase leverage.

Here is a chart of adjusted real income. Note that it has been stagnant for the
"bottom 90%" for the past 40 years.

The savings rate has plummeted; the brief spike up in savings triggered by the global
financial meltdown has already faded. U.S.
households save a mere third of what they once put aside. Note that the savings rate
is not broken out by income; the bottom 90% probably save very little, and the top 10% is probably
responsible for most of the savings. So the "real" savings rate of the bottom 90%
households is likely much lower.

Here is "total credit owed" in the U.S. If income is flat and interest rates
already near zero, then where is the leverage for additional debt going to come from?

The answer is the game of relying on ever-expanding debt is over. You can claim
phantom assets and income streams as collateral for a while, but eventually the market
sniffs out reality, and the phantom assets settle at their real value near zero. Once
the collateral is gone, the debt is also revalued at zero, and the debtor is unable to
borrow more.

This is the position Greece finds itself in; the collateral and income steams have been
discounted, the credit lines have been pulled, and so
the reality of living within one's means is reasserting itself. Living within
one's income (household or national income) requires making difficult trade-offs and
sacrfices: either current consumption is sacrificed for future benefits, or the future
benefits are sacrificed for current consumption. You can't have it both ways once
the collateral and credit both vanish.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.

We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.

The process of the unsustainable collapsing and a new, more sustainable model emerging is
called revolution.

Rather than being powerless, we hold the fundamental building blocks of power. We need neither
permission nor political change to liberate ourselves. A powerless individual becomes
powerful when he renounces the lies and complicity that enable the doomed Status Quo’s
dominance.

"This guy is THE leading visionary on reality.
He routinely discusses things which no one else has talked about, yet,
turn out to be quite relevant months later."
--Walt Howard, commenting about CHS on another blog.

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